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Edited Transcript of ENG.MC earnings conference call or presentation 24-Apr-19 7:00am GMT

Q1 2019 Enagas SA Earnings Call

Madrid Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Enagas SA earnings conference call or presentation Wednesday, April 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Llarden Carratalá

Enagás, S.A. - Executive Chairman

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Conference Call Participants

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* Harry Peter Wyburd

BofA Merrill Lynch, Research Division - VP and Junior Analyst

* Javier Fernandez Garrido

JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Jorge Guimarães

Haitong Bank S.A., Research Division - Former Equity Research Analyst

* José Javier Ruiz Fernandez

Macquarie Research - Analyst

* Olivier Pascal Michel Van Doosselaere

Exane BNP Paribas, Research Division - Analyst of Utilities

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Presentation

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Unidentified Company Representative, [1]

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[Interpreted] Good morning, everyone. Welcome to the results conference for the results of first quarter 2019. The results were presented before the markets opening, and they are available at the website enagas.es.

As normally, Mr. Llardén, our President, will address this conference.

We have foreseen a duration of around 20 minutes, and then we will open the Q&A session, as normally, where we would try and response to the questions as detailedly as possible.

Thank you for your attention. I shall now give the floor to the President, Mr. Antonio Llardén.

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [2]

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[Interpreted] Good morning, ladies and gentlemen. Thank you very much for attending to this conference. You have available the presentation with all the information and the figures since first hours of this morning. As recently, we have held our General Shareholders Meeting. We have presented also our results -- annual results and our update for our strategy. So this call conference is going to be a shorter one. And I will focus on commenting the issues I consider more representative for the situation of the company right now.

7 points I shall cover first. The results of this first quarter that are in line with expectations for both company and market. The after-tax profit amounted to 0.2% higher than the first quarter of 2017 (sic) [2018]. And it totals at absolute terms to EUR 103.9 million. We have a good running of our affiliates that contribute almost to 25% of our net profits versus 20%, which was the contribution 1 year ago. As you can see in the chart, the quarter has been featured by a strong cash generation. The operating cash flow increased by over 18% compared to the first 3 months of the previous year. As you all know, as you may remember, in 2017 and 2018, we reduced considerably our debt. The increase in -- of debt in this first quarter can be explained mainly by the debt issued to acquire Tallgrass, amounting EUR 405 million and also because of the accounting change established by the IFRS 16. The consolidation of Tallgrass will start to be done starting from March 31, 2019. Therefore, its contribution will only begin to be seen starting from April 1 this year. The funds from operations net debt ratio totals 18.1%. And more than 80% of our debt is at fixed rate with a financial cost of 2.1%. So we do not have significant maturities until 2022.

Second point. With regard to our projects and investments, the most relevant element in this quarter has been our entry in the U.S. energy company, Tallgrass Energy. As we have already explained, recently, we have provided many information, many details on this operation. So let me, please, focus to remember how this perfectly fits with our strategy. It is a core business operation in a strategic country for the company, which is United States. And we are having first-level partners, such as Blackstone and GIC from Singapore. Enagás also has a key role as an industrial partner in this operation, and it has got a presence in the Board of Directors. This represents for us a platform for growth at a very low risk. And finally, this brings us a double-digit IRR. This transaction reinforces the medium- and long-term sustainability of our dividend policy.

Also, we also invest in the Trans Adriatic Pipeline project, a key gasoduct for the security of Europe's supply, which is now advanced at 85.7% of completion.

The third point I'd like to cover is the natural gas demand. This demand in the first 3 months of this year has grown in Spain by 2.4% with regards to 2018. It's been the first quarter that has been -- has had little rain, mainly due to the less -- lesser water generation, so the demand for electricity generation has increased by 31.4%. The industrial demand that you may recall is the main element of the gas demand in Spain, continues its very good evolution with an increase of almost 5%. And as for the year until today, in the chart, I think, you can see until April 21, but let me give you the facts, the statistics of last -- of today -- of yesterday. As of 20 -- April 22, demand has grown by 2.4% in the quarter and 3.9% 2 days ago; and as for yesterday, 4.1%. So the evolution is really, really positive.

Point number four. We are fairly committed to the energy transition. It is a process in which we understand natural gas; it has an essential role. Natural gas, LNG, renewal gases will have a key role, so that we can have decarbonization completed. There are industries or elements or environments in which gas is necessary; industry, maritime and heavy overland shipping and transport. So one of the cornerstones of our strategic plan for 2019-2023 that we presented a month ago is precisely our commitment to renewable gas. In the past 2 years, we've entered into 14 agreements with companies and institutions to develop decarbonization-related projects; biomethane and hydrogen projects. The 4 most relevant in this first quarter that have been assigned by CEO are an agreement with Emgrisa, a company to develop biomethane; an agreement with the Ministry of Industry of Spain and the government of the Balearic Islands together with the companies Acciona and CEMEX to cover a green hydrogen generation plant in Mallorca; and finally, a partnership protocol with the government of the Principality of Asturias for nonelectrical renewal projects.

Fifth point, we maintain our leadership in sustainability. We've been for 11 consecutive years, been on the world reference index, the Dow Jones Sustainability Index, which in its last update has placed us as world leaders for the oil and gas storage industry sector. In the first quarter of 2019, we have been recognized additionally for efforts in this regard. We have been given 4 awards. We were included in the Sustainability Yearbook that is published by RobecoSAM, which is a firm that specializes in responsible investing, that also awarded us with the Gold Class medal and the Industry Mover distinction that is granted to companies who have made a substantial improvement in their terms of performance and sustainability. We have also renewed our inclusion in the Ethical Sustainability Index. And we have been selected as well by the Bloomberg Gender Equality Index in 2019, which recognizes our efforts in diversity and equal of -- equality of opportunities. And we've also obtained for the ninth consecutive year the top employer seal for -- since we are one of the companies that have the best practices in human resources.

Now let's tackle the sixth point, which has to do with regulation. We currently have a stable framework until January 2021. Let me do summary. You know, I'm sure, that the Spanish government has recently transferred an important part of the regulation to the CNMC. Well, the CNMC has already announced and explained that it will develop the regulatory process with a clear and transparent methodology. For the first time, there is a calendar that has been established, which both the CNMC and the Ministry for Ecologic Transition will be fulfilling and abiding by, which favors regulatory stability. This calendar has 3 different stages, all of them differentiated, each with its public consultation.

The first stage, which is the initial general framework by the Ministry for Ecological Transition that has already taken place with the recent publication in the Official State Gazette of the energy policy guidelines. And this was done on April 9, so a few days ago. In these guidelines, the ministry has expressly announced its -- for the first time, its endorsement favoring biomethane and other renewable gases, which is, we believe, a very positive step ahead indeed.

The second stage is expected, we -- I think, in a few weeks from now and the CNMC will be publishing an initial draft, the first draft, of what are called new methodologies. We will open a new process -- well, a new process will be opened for all agents and operators in the system to be able to submit their comments to this first draft. We consider that during the second semester this year, the CNMC will finally approve what we call the new methodologies. And the third stage, which will take a few months, we believe, that will be to specify the methodologies and regulations details for all of the regulated companies.

As I have said in a number of occasions, this new system will afford us a greater security and transparency in the regulatory system in the medium term, since the CNMC, which is an independent body, is not subject to fluctuations and the country's political agenda. And finally, and although we have the elections ahead of us, this fact should not have an impact on the regulation because the guidelines are already set regardless of the result of the elections.

And finally, the seventh point, I wanted to say this first quarter, we want to celebrate the fact that we have marked the 50-year anniversary of the arrival of natural gas in Spain. It was in February 1969 when the first LNG methane tanker unloaded its cargo at the Barcelona regasification plant, our most senior infrastructure. And obviously, this was the pioneering terminal in Continental Europe. This milestone was a starting point of the Spanish gas system as we know it today. Natural gas has been a key element for our country's economy, transforming the industry and it had a decisive contribution to its development. This key role that gas has and continues to have today is clear since 60% of the gas that is being consumed in Spain is dedicated to industry; 60% is dedicated to industry. It is an activity that is irreplaceable due to its calorific value and competitiveness. These 50 years since gas first reached Spain and the Barcelona plant are the roots of our history. That is why Enagás is also celebrating its 50th anniversary in 2019.

And I would like to end with a few conclusions. Our first quarter results are in line with the expectations for both the company and the market. Our affiliates continue increasing their contributions to the business. They have nearly reached 25% of our net profit. We continue showing off our financial situation with solid cash generation and over 80% of our debt at a fixed rate with no significant maturities until 2022.

The entry of Enagás and Tallgrass Energy together with Blackstone and GIC fits perfectly with our strategy and bolsters the medium- and long-term sustainability of our dividend policy. We are aware of the fact that natural gas has an important role in the energy transition and of the opportunities that our company has in the decarbonization process. And we are actively working on renewable gas projects.

And finally, from the standpoint of regulation, our current framework is stable until 2021. The transfer of one important part of our competencies to the CNMC gives more visibility to the regulatory revision process.

I would like to thank you for your attention, and I obviously encourage you to asking whatever questions you deem appropriate. And as we always do, the whole team will try to give you as much detail as we can with our answers. Thank you very much.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) The first question will be asked by Javier Suarez from Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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[Interpreted] My name is Javier Suarez from Mediobanca. I have 3 questions. The first question has to do with a comment which was made by the President, I believe, regarding the impact that the change in the administration may have with the new elections, the impact that it will have on the regulatory calendar. I would like you to please elaborate on your comment. My question is do you think that as a consequence of a change in government with the new results of the elections after next Sunday, could that have an impact on the regulatory calendar from the point of view of approving the regulations are still pending or the general guidelines that you have mentioned? Any comments regarding that would be much welcome. The second question.

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Operator [3]

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[Interpreted] I'm sorry, we have lost connection. We can't seem to hear.

(technical difficulty)

(technical difficulty)

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [4]

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[Interpreted] The conversations with the Peruvian administration, what situation are we in? Could we have a friendly agreement? And what would be the timing of that agreement, the possibility that the company currently has? And what's your last update with regards to that situation and how could that be solved? And the third question I had has to do with TAP, T-A-P. You've mentioned that the infrastructure has been completed up to 86%. And I would like to know if you could update us with regard to the possibility of that infrastructure being delayed due to that delay that you have assumed in your last business plan.

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [5]

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[Interpreted] Thank you so much, Mr. Javier Suarez. I will try to quickly answer to those 3 questions. First of all, with regards to the elections, we don't have a crystal ball, I'm afraid, but we do think that the steps that have been taken on the one hand with regards to the transfer of competencies from the administration to this independent body, the CNMC, is something that had been demanded by the European Commission for many years. And the different governments in Spain were working on it. And we honestly think that this decision was not something that could be changed by some future government. So there is a high consensus in that sense in the sector.

Now as for the calendar, since the calendar has already been approved by the CNMC and since the first stage has already been completed, we don't really see how an electoral process with potential change of government, even if it is government of the same political party but with different ministers, we don't see how that could have an impact when the calendar has already been approved. The CNMC has already taken its internal measures for that to take place, so we don't see how that could be modified. Now the general guidelines that have been recently approved, I was saying that during my conference call, we believe that in general lines, remember that we're talking about the gas system -- the gas sector. Maybe with the electrical sector, it could be a bit more complex, but we have not really seen the previous -- we haven't seen really during the debate, during the political discussions, any discrepancies with regards to those guidelines. So we don't expect many changes. Obviously having said that, a change in government can always have a certain impact if a new topic were to be tackled, something that had not been contemplated yet in these guidelines that were published by the CNMC. But I would dare to say that the consensus of the market, if you'll allow me, or the consensus of this sector is that we believe that this regulatory changes already have their own path set for them, a calendar set for them, and we do not really believe that political situations or debates could have an influence really.

Now for the second topic in Peru, we keep on working on the arbitration process, which is unfolding as expected, following the foreseen calendar. This is the process that could last around 3 years. 2 of the 3 arbitrators have been appointed. We are still working on appointing the third. And although I can't give you any news with that regard, we have repeated to the Peruvian administration our intention of reviewing the different topics and agreeing on certain things.

And now for the TAP, the Trans Adriatic Pipeline, I have talked about 86% of completion of advancement of the project, and we have foreseen for 2020 for this gasoduct to be operational. So we, obviously, have said at the midyear, the date for the beginning of the work, it could be before that or after that, but we maintain that date because we think it is the most adequate time. And I think I have answered all of your questions. Thank you very much.

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Operator [6]

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[Interpreted] Next question will be done by Javier Garrido from JPMorgan.

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Javier Fernandez Garrido, JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst [7]

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[Interpreted] Two questions. First, related to the recent (inaudible) views for the final operation level in the gas system, designed gas cover the last contribution of a trader, could you give us what's your opinion on what the risk level that Enagás give to the distribution vendors and that the risk is covered by the system, but could you give us some information on the cost that this is having for Enagás and how you will recover that? Second question is regarding GNL Quintero. (inaudible) Does it reflect any kind of change in the controlled capacity that Enagás has on that affiliate? Or do you -- it really does not have any meaning or any effect on the control? And as for the LNG Quintero, could you give us an update on the perspective for that company on a midterm? Because there was the cancellation of extending capacity, maybe you will extend capacity in the future. Is there any possibility in the coming years to enlarge the capacity of LNG Quintero?

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [8]

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[Interpreted] Thank you very much, Mr. Garrido. First of all, while this is something that is inside the normal running of the gas systems in Spain, thanks to the opening and liberalization process that started like 12 -- 15 years ago. We have got many traders that work with a license. Some of them, the biggest ones are the mostly known, but there are 2 -- 20 or 30 traders that are smaller that work normally. Let me use a stock exchange term. Sometimes they are -- they fall short because of their selling commitment with other traders. It might reach at a certain moment in time lack of liquidity in terms of gas terms. So in this case, the regulation settles, and it has been working since long. And that is the system operator, the one that advances the gas amount when we have gas in the system and storage. Of course, these imbalances periodically are analyzed. And if at any moment in time there is an imbalance, this has to be solved either by the trader or collectively by the whole of the gas management, if we can call it that way. So this is not something new. And at the same time, this has no significant weight in the gas movement that takes place in Spain. So this is business as usual.

And as far as LNG Quintero, the change in the accountancy is the consequence of a new agreement with the shareholders where we are setting with the other big shareholder, the Canadian pay -- pension fund, a co-control agreement. This doesn't change substantially the agreements we had -- we have, but that compels us to do that accounting change. And related to this, we haven't discarded 100% the possibility of extending and building a third tank. This project right now, it's true, is not at the beginning of the pipeline, but we do have other organic growth projects for LNG Quintero at around $100 million. In future meetings, we will provide more information on this topic. And I think I've covered the 2 questions you had. Thank you.

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Operator [9]

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[Interpreted] The next question will be asked by José Ruiz from Macquarie.

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José Javier Ruiz Fernandez, Macquarie Research - Analyst [10]

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[Interpreted] I only have one question. I wanted to know, if possible, if there are any details with regards to your demand growth estimations for 2019. I wanted to know what your estimations your -- are for domestic demand growth, which seem to be negative during the first quarter. And secondly, with regards to the industrial growth demand [he said for the electrical sector, I don't know if that's what he]...

(technical difficulty)

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [11]

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[Interpreted] Thank you so much, Mr. José Ruiz. I don't have all the details by sectors, but I could tell you that in round figures, we have forecast for 2019 of 3% demand. In absolute figures, it could be 343 terawatts per hour. And we are at a rhythm of 2.4% at the closing of first quarter. But as you saw, yesterday it represented 4.1%. This is much viable from one month to the next because it depends whether it rains more or less, whether it's more or less cold.

As for the domestic sector, which only represents 15% of the demand, this first quarter has been very good weather-wise and that is why this is just half. But if you add it all up, we are above our forecast -- our demand forecast. Nonetheless, we are very cautious, and we maintain a 3% demand for the whole of the year. And I think that I am giving you a general answer for all of the basic element of your question. Thank you very much.

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Operator [12]

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[Interpreted] Next question will be done by Jorge Guimarães from JB Capital Markets.

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Jorge Guimarães, Haitong Bank S.A., Research Division - Former Equity Research Analyst [13]

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[Interpreted] Two questions. First is related to Spanish regulation. Do you think that with the variable remuneration of the RSS (sic) [RCS], will that gas demand make the regulator to be more strict and, therefore, trying to shorten it in the longer term and maybe put that component at risk? Second question. Which will be the cost debt objective for 2019 without Quintero?

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [14]

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[Interpreted] Jorge Guimarães, first question, the core objective of the regulation, at least the current one until 2021 was precisely to reduce and, if possible, to eliminate the tariff deficits that was created between 2010 and 2013. So this deficit being eliminated for the first time because it doesn't grow every year, but it reduces, is mainly due to the addition of 2 factors. First, the cost of the gas system in general is stable. There are no new major investments every year, so that gives us cost stability, and the revenues are directly related to the gas volume transported. I'm talking about the system, not Enagás' revenues. This gas volume transported in Spain since we've had this new revision 2013/2014. The demand has increased every year, more some years than others. And we've had until now accumulated demand -- annual demand of 4%. For this year, we expect 3%, but we expect the coming years to follow similar lines. From this stance, the RCS factor, which is just one part of the formula of our remuneration that was decided by the regulator 5 years ago, we understand that will continue to exist in this way or another, but precisely what brings the balance to the Spanish system is amongst other things for a positive demand. So this should not concern the regulator. But on the contrary, I'll -- let me remind that the impact in Enagás' revenues of having more or less demand is really a minor impact. So we do understand -- well, we will see what formulae the regulator sets, but the fact that the demand is positive and grows is not only not a concern, but is rather one of the positive major impacts of the balance situation of the gas Spanish system, which I insist we have eliminated the deficit creation every year. But we are reducing part of the previous deficit. And if we continue this track, in less than what we had expected, we will be eliminating this deficit, a deficit that if you compare to the deficit of the electric system has nothing to do. We're talking about the total amount of 1 billion, so this is perfectly controlled. Regarding your second question, our forecast for costs in 2019 will be around 2.2%. And I think that is the answers to -- these are the answers to your question. Thank you.

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Operator [15]

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We don't have any more Spanish questions, so we will open the English channel. The first question in English comes from Harry Wyburd from Bank of America Merrill Lynch.

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Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [16]

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Just one question from me, please, on Tallgrass. So the presentation on Tallgrass mentioned that there was about $300 million potential future investment. So I just wanted to understand what time frame you expected for that. And is that a mandatory investment or is that discretionary on you? And added to that, could Tallgrass do any acquisitions in future? And if so how would those be funded?

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [17]

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[Interpreted] Harry, thank you very much. Well, in the agreement that the Board of Directors signed that triggered this participation, we clearly foresaw a figure of around $300 million for growth in the platforms that we share with GIC and Blackstone in order to grow in this company without a very precise calendar, but we will see it during the next meetings of the Board of Directors. We will have the first formal meeting next month with all the partners. So we have foreseen this. This is within our calculations and forecast, but it's not mandatory. It will depend on the evolution of the different opportunities. And I think I have answered your question at least.

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Operator [18]

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The next question comes from Olivier Van Doosselaere from Exane.

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Olivier Pascal Michel Van Doosselaere, Exane BNP Paribas, Research Division - Analyst of Utilities [19]

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I just had 2. First one, I was wondering if you could please give us, maybe, some guidance on your expected EBITDA and net income on a pro forma basis for 2019. And then the second one is also again coming back on Tallgrass. I know you mentioned it's a low-risk asset. I believe that there are some concerns in the market with some contract maturities on one particular asset of Tallgrass, which is the next pipeline, with some people wondering that if in 2024, when those contracts mature, those assets might become obsolete given the very big change in the gas landscaping in the U.S. with the rising shale gas. So I was wondering what your view was on that topic particularly.

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Unidentified Company Representative, [20]

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[Interpreted] Thank you, Olivier. Let me reply quickly. Our guidance for net result is around EUR 416 million, EUR 419 million; for EBITDA, EUR 936 million. And as for Tallgrass is concerned, we explained this in the conference call where we did the investment. The series of contacts of -- sorry, contracts on the long and midterm that this company has, all the partners have analyzed them one by one. They have got different maturities. And with external experts, we have seen the evolution of the company and the signature of new contracts this year is being done fully in line with normal terms. So there is -- you must think that there is no climb that is bigger than 14%, 15% of the volume of contracts. So we do think that in this sense, the evolution of the hydrocarbons, American -- U.S. system ensures its future, so there's no problem. This company must be moving around as an average between 4% to 5% of gas in the United States, so it is well representative of the sector. And at the same time, it doesn't have volumes of a single client or by zone that may have special risks. So this would be the comment I have on your question. Thank you.

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Operator [21]

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Thank you very much. There are no further questions in the conference call.

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Antonio Llarden Carratalá, Enagás, S.A. - Executive Chairman [22]

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[Interpreted] Thank you, everyone. If there are no further questions, we will conclude the conference now. Thank you very much.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]